Weekly Market Snapshot – February 24th, 2020
Created by: Sam Tenney
I wanted to provide a quick update on the coronavirus and how we see its potential impact on investments short and intermediate term. As Warren Buffet warned this morning, you shouldn’t make an investment decision to buy or sell based on the whims of the current news, rather based on the long-term. Even with the long-term in mind, the stock market falling 3% or more in a day can be unnerving.
I do think it is important to understand where the economy is now and how the coronavirus epidemic could provide a shock to the economy in the short to intermediate term. I can’t speak to the seriousness of the virus or what the coming days will bring for its eventual eradication or the continued spread into a full-blown pandemic.
The US economy is in a vulnerable position and susceptible to external shocks, such as the coronavirus, or an unexpected outcome of the presidential election or any number of other events. Even if the US does not experience a major epidemic, our economy is impacted by the rest of the world. The supply chain of goods to the US and the globe has already been disrupted. Further spreading of the virus threatens trade and the global economy. Given the current signs of weakness, a shock to the global economy that lasts for 3 to 6 months would likely push us and other countries into a recession. If the Fed does lower interest rates (which the market is expecting now), this will have the potential to soften the economic shock although historically, if large employment losses add up, a recession occurs regardless of lower interest rates.
We have positioned our client portfolios more defensively based on these risks (as well as high valuations and others we’ve previously mentioned) and we are looking for openings to take more risk as the opportunities present themselves and fundamentals improve. We will pray that the coronavirus epidemic is eradicated quickly, and China and the rest of the world can recover.
Sam Tenney
- The IHS Composite Purchasing Managers Index, Composite PMI, fell sharply to 49.6%. This is a contractionary environment for the private sector, driven by a large decrease in business new orders and employment growth. ¹
- The Federal Reserve Minutes for January 28th noted that the Fed Board believes the Coronavirus to warrant close watching, as it could disturb global growth. Since the time of the meeting, January 28th, the estimated cases worldwide were around 4,600 and now on February 21st we have around 77,000 cases worldwide.²
- Japanese GDP has shrunk 6.3% for the quarter on both a large sales tax increase reducing consumption spending, and coronavirus fears hitting manufacturing. Japan is currently the third largest economy in the world measured by GDP.³
SOURCES
1. https://tradingeconomics.com/united-states/composite-pmi
2. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20200129.pdf
3. https://www.japantimes.co.jp/news/2020/02/17/business/economy-business/s…
4. https://www.marketwatch.com/story/fed-holds-benchmark-interest-rate-stea…
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